There are a number of reasons the buyer of a business will ask the seller to sign a non-compete clause, all pertaining to the buyer receiving the full value of the seller’s business and the assurance the seller will not compete with the buyer. The full value of a business includes its hard assets as well as the goodwill and unique ideas of the founder or previous owner. The specifics of a non-compete clause will help you better protect yourself if you buy an existing business, and give you flexibility if you sell one.

Non-Compete Clauses

A non-compete clause in a business sale contract is an agreement that a seller of a business will not open a new business or work for a competitor for a specific time or within a specific geographic area. A business owner might be required to keep any information regarding the business he sells confidential. Employees and contractors often sign no-compete clauses to prevent them from learning a business’s secrets, then using those secrets to sell against the company. Consider getting key employees of a business you buy to sign non-compete clauses in exchange for a benefit.

Specifics

A non-compete clause should be as specific as possible if you are the buyer of a business. Include the type of business activities the seller may not engage in, the geographic area in which he may not compete and the length of the clause. For example, if you purchase a local restaurant, you might not care if the seller opens a restaurant in another state. Consider where the seller could hurt you if he opened a similar business and preclude him from doing business in that area. If the business is a national or online business, the geographic area might be very large. In some instances, you can preclude the seller from using his name, initials or likeness if they are closely associated with the business you just bought. This is why it’s important to include the goodwill of a business, or its reputation, in a no-compete clause. Include any proprietary assets of the company, including recipes, patents, trademarks or other methods the business uses. Prevent the seller from working for, providing consulting services to or advising your competitors. If you are the seller of the business, do not rely on a casual assurance from the buyer that you can engage in certain business activities -- get it in writing.

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Legalities

Research restrictions on non-compete agreements in your state to ensure you write an enforceable contract. For example, some states limit the number of years or the geographic area included in no-compete clauses. This protects the buyer from placing unreasonable restraints on the seller. It might not be unreasonable for a tennis instructor who sells her tennis business to agree not to teach lessons or work for another tennis facility in the same county for two years. This gives the new owner a chance to establish himself. Telling the instructor she can’t teach tennis anywhere in the state for 10 years would probably be considered too restrictive.

Penalties

Include specific penalties for breach of the no-compete clause in your contract, including payment of legal fees, fines and damages. These should be onerous enough to prevent the seller from trying to breach the contract. Agree to how a breach action will be adjudicated, including whether it will be settled in court or through binding arbitration, and where the legal action will be adjudicated. Include an agreement that you are allowed to communicate the non-compete provisions of your contract to other businesses in the area in which the clause is in effect. This will prevent them from trying to hire the seller.

References

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About the Author

Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.